Sunday, June 20, 2021

Serba Dinamik - Inconsistencies in Financial Reporting

I have a confession to make: despite advocating for the importance of doing due diligence on a stock before clicking the buy button, I went against my advice and bought a listed company in Malaysia without doing any research. The stock turned sour. The company is Serba Dinamik, ticker symbol: SERBADK.

I invested into this company with the ang pow money from Malaysian relatives. Not to blame myself for having roots in Malaysia, but if I had not had Malaysian currency in the first place, I would not have invested in this company. How have I decided to buy into this company? I quickly skimmed through some analyst reports and suggestions from the broker and went ahead because it was only a small sum of money.

Just less than a month ago, when the company announced that KPMG refused to sign off its accounts, the news made headlines in The Edge Magazine, and was also reported in Singapore’s Straits Times and ChannelNewsAsia. That was when it caught my interest to delve into its financial statements. As the devil is in the details, I dug into the past years’ financial numbers and identified many potential warning signs. In hindsight, I could have avoided this stock if I had done my homework. 

Here’s my findings. However, hindsight is 20/20 – here’s what I would have seen with perfect vision. 

1. Unable to ascertain the legitimacy of certain trade receivables balances 

In accrual accounting, once a service or product is delivered, the transaction will be realized as revenue, even if the cash is not received. Having a ballooning accounts receivable signals that the company is having trouble getting paid for its products or services. Look at Days Sales Outstanding (DSO).



 DSO shows how many days it takes for a customer to convert account receivables to cash. This alone does not signal accounting fraud, but coupled with the fact that KPMG had difficulty verifying its clients and sales transactions did cause me to raise my eyebrow. The bulk of its account receivables originated from its customers in the Middle East, and KPMG had discovered that certain customers do not bear registration numbers - an ominous prelude to what could later become financial shenanigans.

There were many users in online forums who lambasted KPMG’s delay in sounding alarm bells after auditing Serba Dinamik’s accounts for many years. However, the situation is far more nuanced than it seems. If KPMG had discovered only one or two minor errors from past audits, I believe the auditor could let it pass. But, recognizing the growing trend of a poor earnings quality coupled with the difficulty in verifying sales transactions definitely raises some eyebrows, leading the auditors to scrutinize the accounts more closely this time round.

When it comes to trade payables, one of the findings by KPMG was that the fax contact number of its supplier (per the official website) belongs to one of the group’s employees using a ‘Truecaller’ Application. When a company’s supplier shares the same phone number as its employee, that gets me wondering: is there something behind the numbers? As an outside investor, I can’t be sure if the transaction is really at arm’s length between local suppliers and Serba Dinamik. 

2. Consistent Gross Profit Margin (GPM), Operating Profit Margin (OPM) and Net Profit Margin (NPM)






The above is the GPM, OPM and NPM of the companies operating in the same sector as Seba Dinamik: Bumi Armada Berhad, Yinson Holdings Berhad and Wah Seong. Notice what they have in common: from the charts above, one should easily infer that the profit margins are quite lumpy but genuine due to the timing of contracts delivered. 



However, the same cannot be said for Serba Dinamik, where its GPM and NPM have been very stable over the past five years. In my view, it seems too good to be true.

Moreover, 2020 was a challenging year for the Oil and Gas (O&G) industry due to declining oil prices, thanks to Covid-19. One does not need to look too far: Singapore blue chip companies like Keppel Corp and Sembawang Marine Corporation were struggling last year and their numbers are still in the red. Yet, Serba Dinamik miraculously defied all odds and managed to achieve an all-time high revenue and profit through inflating receivables.

3. Proposed to replace KPMG when audit issues were raised.

To add fuel to fire, just a few days after the financial report, the director proposed to replace its auditor from big four KPMG to an unheard of company, BDO PLT. As the saying goes: Quis custodiet Ipsos custodes - who watches the watchmen? The watchmen are auditors and CFOs. To fire the auditor after some potentially damaging accounting issue surfaced is a major red flag to look out for; hence, I choose to err on the side of caution and cut my losses.

The board’s decision to persuade KPMG to resign suggested that management may have cooked the books and have something to hide. The market reacted to the news by sending the stock price tumbling. Even the reputable Employees Provident Fund (EPF) and Permodalan Nasional Berhad (PNB), who have been known for delivering promising returns, expressed their concerns. When the market opened on the June first, I tried to place a sell order below the last traded price to get my order filled immediately. I was dealt a shocking blow when I found out that I could only sell at a fixed price of RM 0.795. In the end I got my 1,200 shares filled at RM0.795 and another half at RM0.90.

Although the management gave in to shareholders’ pressure and shelved his plans on changing auditors, the damage had already been done and stocks showed no signs of recovery. Although the stock price reversed its course and shot up to RM0.75 (intraday gain of 24.8%) due to the news that Ernst & Young was appointed as an independent reviewer, it was short-lived and the stock gave up most of its gains in a short span of time.

4. Consistently Negative Change in Working Capital

This is not accounting fraud, but it is a tell-tale sign of a company with poor fundamentals. When you have a negative change in working capital, it means that the company is investing heavily in its current assets and reducing its current liabilities. In Serba Dinamik’s case, its current working capital is made up of inventories, receivables, payables, and net contract assets. Hence, this suggests that Serba Dinamik is investing in most of its operating cash flow to ramp up on receivables and inventories. By doing a ratio between change in working capital and cash generated from operations before working capital, we get a ratio hovering close to one. That explains why there has been no free cash flow over the years. Most of their current cash, past dividends and capital expenditure were financed through issuance of term loans, private placements and proceeds from Sukkuk.





Negative Free Cashflow for the past 5 years (RM '000)


In a healthy financial statement, an increase in company cash flow from operations should track its increases in net income, and this divergence in number suggests that the company is generating sales without collecting the cash - in this case, on receivables and inventory. That probably explains why the auditor was concerned about its suppliers. 

Once bitten, twice shy. It is indeed a sobering reminder for me to do my research on any stocks that I plan to buy, no matter how small the investment may be. But retrospectively, it is a blessing in disguise as the ‘school fee’ from my losses in this share is worth paying, since I have gained much insight on what’s 'really' behind the numbers.

Thank you so much for spending time to read my blog and I really appreciate you. If you enjoyed reading my blog, hope you can support me by liking my Facebook page here or share my post. Currently, I do not earn any fees through any affiliate programme or sponsor. If you have any queries, feel free to post them and I am happy to take questions! :)


Sunday, May 30, 2021

Portfolio Updates (May 2021)

It has been another month of a roller coaster ride for US tech stocks and the shares in my growth portfolio have also taken a plunge. The selloff was attributed to the fear of rising interest rates as inflation picks up steam. While a high inflation environment may hurt stocks in the short run, history have also shown that stocks beat inflation over the long run.

Every time, after each crisis, the rich get richer, and the poor get poorer. So, despite the uncertain economic outlook, I will continue to stay invested. Just look at the net worth of billionaires before and during the Covid 19 season.


Source: https://www.statista.com/chart/22068/change-in-wealth-of-billionaires-during-pandemic/

(1) Growth Portfolio




Other than the two new additions for my US portfolio, UiPath and Alphabet Class A, I have been averaging down most of my US stocks. Practically most of my tech stocks had blowout quarters, yet the shares tanked after the earnings report. For instance, The Trade Desk, reported 37% revenue growth, achieved free cash flow, and announced a ten-for-one stock split. Yet the top ranked demand-side platform, which benefits from the rise of streaming services, still got punished down 26% in a single trading session. I believe investors are taking reference from FAANG earnings such as Google and Facebook, which had 34% and 48% revenue growth. Since mega cap stocks can achieve such high returns, investors are expecting more growth from smaller cap tech stocks to compensate for their higher risks. After all, it is about the opportunity costs.


Amazon 

Amazon.com has become so popular that it has become a verb. i.e., if your business is Amazon-ed, it means your business is disrupted.  Despite being an ecommerce behemoth with a market cap of USD 1.63T, its growth is not slowing down anytime soon. I bought a few shares before its earnings, hoping that the rumour of a stock split would play out. In the end, there was no stock split, yet Amazon crushed analysts’ expectations, with revenue up 44%, but stock price is hovering around the $3,200 range. 

 

Unfortunately, the rumours of a stock split turned out to be mere unfounded speculation. Although the stock split did not happen (yet), I have no regrets of owning shares of this company. In fact, a stock split does nothing to the fundamentals of a company. Like a pizza, you own more slices of it but smaller pieces after a split. Since history has shown that stock splits always drive-up stock prices (remember Apple and Tesla stock splits), my FOMO actually kicked in and bought the shares.


Most of us know Amazon for being an e-commerce company. Although the tech giant derives most of its revenue from e-commerce, this segment only accounts for 33% of its operating income, with Amazon Web Service making up the rest of its earnings. Despite the stellar growth in AWS, I believe this cloud infrastructure has only scratched the surface of cloud computing’s potential. 


Check out their clients: https://www.contino.io/insights/whos-using-aws



These are big companies like Adobe, Disney, Novartis, McDonalds, and Baidu. Even streaming giants such as Disney and Netflix, who are competing against Amazon Prime, are using AWS. Whichever side of the streaming services you are on, they are all contributing to AWS when their demands grow. Even Apple is said to be a client of AWS.

Furthermore, there is still a huge runway for AWS when 5G becomes more mainstream. When full self-driving and Internet of Things become the new normal, they will require low latency connectivity, which translates to a higher demand for edge computing and hybrid cloud. Since Amazon is an indisputable leader in providing cloud platforms and infrastructures (as seen with AWS Outposts and AWS Snow series), it will inevitably dominate the future landscape of 5G.

 

Roblox


This is a company which I added to my watchlist recently. From the surface, it seems like a platform for developers to create new games with limited coding knowledge and a multiplayer online game for young children and early teens. It currently makes money from selling Robux, an in-house currency which can be used to upgrade one’s avatar or enhance abilities of a game player. 

 

My belief is that Roblox is more than just a game but a metaverse platform which is gaining popularity. If you cannot attend a concert physically due to Covid 19, think of being present in a virtual concert. Lil Nas X has successfully hosted a concert in Roblox which attracted 33 million visits; it was indeed a roaring success. If one can organize a concert in a metaverse, one can also officiate virtual weddings, organize birthday parties, throw baby showers…the possibilities are (virtually!) endless. 

 

Secondly, Roblox is partnering with Tencent to develop its own version of Roblox in China, with the former owning 51% of the partnership. It also aims to focus on providing education in STEM (Science, Technology, Engineering and Mathematics). 

 

As China is the country with the biggest gaming industry due to its huge population, it is able to scale leaps and bounds by having access to the 800 million internet users. Moreover, having Tencent, which globally dominates the gaming industry, as Roblox’s partner, Roblox is able to benefit from its gaming expertise to bring the metaverse to fruition in China.

 

Currently, Roblox seems to be priced for perfection, trading at 46.5X price to sales ratio. Despite a rich valuation, one must look beyond its revenue and consider its bookings segment. Similar to deferred revenue, bookings account for cash which is received by Roblox but has not been earned. This can be likened to the case of Starbucks, whereby the value that is loaded into the Rewards Card will not be reflected as sales until coffee is bought. In Q1 2020, Roblox reported bookings of $652mil, up 161%. If we consider bookings as part of revenue, it would be trading at a more reasonable 23.4 price to sales ratio.






TTM for Revenue+Bookings= USD 2.285b
Market Cap (18th May closing)= USD 53.433b
Price/ Sales= 23.4x


(2) Dividend Portfolio




When the phase II heightened alert was announced, there was a sudden sell down in Singapore shares, particularly in the  bank sector and retail REITS. Even industrial REITS were not spared either, and I took the opportunity to add Ascendas REIT at $2.86 and $2.92. In my view, the REITS sell down was unwarranted since a month of heightened alert will not cause a fundamental change in their long term prospects.

 

The following Monday, I bit the bullet and sold off all my bank shares: DBS at $29.00+41.49%, UOB at $25.10+24.48% and OCBC at $11.70+14.91%. Unfortunately, after selling, the share prices took a turn and resumed its uptrend. Well, all I can say is short term pain for long term gain. From my blogpost last month, I have said that I would like to focus more on growth companies which can deliver superior returns, which the financial sector cannot achieve. That being said, I will still continue to grow my dividend portfolio by adding on REITS, as I would still like to grow my passive income.


I am currently sitting on about $108k in cash and will continue to add on to promising and disruptive tech companies for the long haul. The next few months will be rocky for tech stocks as the monetary policy outlook remains uncertain, but I see it as an opportunity to buy on weakness.

Stock Portfolio: $444,651

Total Cash at Hand: $108,000

Total Portfolio Value: $552,651




Portfolio1  Net Worth (Dividend+Growth): $444,651

Portfolio 2 Net Worth; $193,833

Total Cash at Hand: $108,000

Net Worth (Cash+Equity) = $746,484

Thank you so much for spending time to read my blog and I really appreciate you. If you enjoyed reading my blog, hope you can support me by liking my Facebook page here or share my post. Currently, I do not earn any fees through any affiliate programme or sponsor. If you have any queries, feel free to post them and I am happy to take questions! :)



Saturday, May 15, 2021

Investing during turbulant times

Unless you are living under a rock or you became a rock, you would know that tech stocks - especially shares of Ark Invest, which were once darlings of Wall Street - are having a meltdown. In my view, the current sell down is attributed to plenty of risky investing behavior in the past few months. These include speculating meme stocks, punting penny shares, and investing into the SPAC mania with no fundamentals; these were further fuelled by the rise of many new trading platforms with zero commission fees.

Truth to be told, my growth portfolio was not spared either. Instead of this month’s usual stock analysis, I will be sharing my strategy on what I am doing in these turbulent times.


Invest in FAANG Stocks

 

I would buy into FAANG (Facebook, Amazon, Apple, Netflix and Google) stocks to benefit from the stock market recovery earlier.

 

The Nasdaq composite is weighted by market capitalization like S&P 500, meaning that companies with large market capitalization will have the most significant impact on the overall index. Here is the list of the top 20 largest market cap tech stocks - it occupies 1/3 of the Nasdaq index. 

 

The direction of the stock market is mostly dependent on the movement of the stock index, which is driven by the ups and downs of the large cap companies. Hence, big cap companies will be at the forefront in stock market recovery while smaller cap companies take the backseat.

 


Furthermore, if the prospects of rising interest rates came true this year, then the large cap companies would be less affected since they have good earnings and generate huge amounts of FCF (Free Cash Flow) on a GAAP (Generally Accepted Accounting Principles) basis; comparably, smaller cap companies with high operating expenses relative to gross profit (Teladoc, Open-door, Fastly) will be worse hit. 


Therefore, holding on to tech titans like Apple or Amazon shares in your portfolio could counter some of the pain of the stock losses and ride out the volatility.


Put things into perspective and do not panic sell


In 2018, I first dipped my toes into the US market by purchasing 10 shares of Shopify at USD163. A few weeks later, the shares sank to USD 120, a loss of 26% due to the lackluster earnings report. To rub salt into the wound, one analyst predicted that Shopify is only worth USD60 due to its high price-to-sales ratio.The stock decline made me feel jittery, but being a long-term investor who knows their time horizon, I decided to hold on to my shares.




Fast forward a few years later, the miniscule drop is so insignificant compared to the gains I have made to date. My only regret is not buying more when it dipped. The lesson? Time in the market is more important than timing the market.



Retrospectively, it would not have mattered whether I bought Shopify at 5% lower or 5% higher.  Back then, Shopify was also trading at a steep price-to-sales ratio, but I agree that in the words of Warren Buffett, “it is far better to buy a wonderful company at a fair price, rather than a fair company at a wonderful price.”


If I had panicked-sold back then, I would have missed out the opportunity of owning shares of this great SaaS (Software as a Service) company. Similarly, in the current situation, I will continue to “hodl” all my growth shares because their fundamentals are intact and I have conviction in their ability to scale. In fact, the current stock market rout is an opportunity for me to add more shares at a discount.


Do Nothing


Sometimes, the best thing to do during a market correction is to do nothing. The Oracle of Omaha also famously said, “The most important quality for an investor is temperament, not intellect. You need a temperament that neither derives great pleasure from being with the crowd nor against the crowd.” Being invested in the equity market for ten years, I have been through ups and downs of the stock market such as times when the US lost its triple AAA bond rating in 2011, the UK voted to leave the EU in 2014 and the US imposed more tariffs on China in 2019. The lesson I learned is that the stock market always goes up in the long run. Instead of getting so fixated with every sensationalized news headline that Wall Street wants every retail investor to hear, try doing... nothing! Ignore the noise in the stock market. Take a deep breath, turn off the news, and do not check your stock portfolio. 


Experience tells me that selling your shares during the stock market correction is the worst thing that a long-term investor should do unless you are a trader. In my case, I have a nine-year time horizon to achieve my goal of $3.909 million; therefore, in the grand scheme of things, two months of volatility does not matter to me.


If you have thoughts of selling your shares when they tank in hopes of buying them back at a lower price, consider this: you have no way of predicting when the stock market will recover, and simply missing a few best days in the stock market could be disastrous for your portfolio. According to Fidelity, missing the top 10 best days in the stock market could affect your overall return by half. Usually, the stock market performs best right after a correction.


S&P 500 index fund from 1980 to 2018

Look at the chart below. The S&P 500 index plunged 9% in a single day over news that the Federal Reserve would begin Quantitative Easing. Just a day later, it went back up by 9%. If you had cut your losses during the drop, you would have missed out 9% in a single day and all the big gains in the following month.


S&P 500 Index

With that being said, it is as important to know the reason for owning your stocks as it is to have a portfolio strategy. Investing should be like a game of chess, where you have a clear investing strategy, and not roulette, where you buy stocks which are en vogue at that point and expect them to rise sharply in a short period of time. Take a good look at your current portfolio, and if you don’t know the reasons why you purchased them in the first place, it is time to read up or do research on the companies you own. If you finally realized that the stocks do not match your risk profile, take it as a lesson learnt, bite the bullet and move on. To err is human, after all.

 

I remember a Facebook user just began his investing journey and was looking for a mentor. Another user responded, “you don’t need one; thestock market is your mentor.” Although it was funny, there was some truth in it, too. Only once you get your hands dirty and truly participate in the stock market long enough, you will understand that the stock market is like a roller coaster and volatility is part of the ride.

Thank you so much for spending time to read my blog and I really appreciate you. If you enjoyed reading my blog, hope you can support me by liking my Facebook page here or share my post. Currently, I do not earn any fees through any affiliate programme or sponsor. If you have any queries, feel free to post them and I am happy to take questions! :)

How did your stock portfolio perform this month? Are you affected by the tech stocks recent volatility?





Friday, April 30, 2021

What's the intrinsic value of Mapletree North Asia Commercial Trust (MNACT) after earnings report?

A year has passed since I last wrote about Mapletree North Asia Commercial Trust (MNACT); check it out here. Back then, MNACT was hit with a double whammy in the form of Hong Kong protests followed by the Covid-19 pandemic.

The Reit took a tumble and closed at $0.790 in 14th May 2020. Today, the dust has settled a little and it closed at $1.09 as of 29th Apr, a YTD return of 8.3%. Despite the price improvement, I believe that better days are ahead for this Reit.

As I have done a thorough analysis in my previous blog post, I won’t go so in-depth this time around; instead, I will revisit my valuations and share my thoughts on the Gangnam property acquisition.

Similar to last year, I will be using Sum of the Parts valuation and Discounted Dividend Model to determine its intrinsic value. As interest rates have changed, I will recalculate the discount rate.

To determine the discount rate via CAPM Model

Discount Rate= E(R)= Rf + β (Rm - Rf 6.33

β= 0.94




Rf= 1.610%

http://www.worldgovernmentbonds.com/bond-historical-data/singapore/10-years/


Rm= 6.63%



Distributable income= 72% of NPI

1. Properties in Japan

I must say that these are the sets of properties in MNACT that I like the most due to their freehold tenure, full occupancy (with the exception of mBAY POINT Makuhari), and loyal tenants who have occupied the buildings since they were first constructed - almost as if the buildings were built for them.

Retrospectively, I was overly conservative in projecting a dip in rental income for the properties acquired in 2019 and zero growth for properties acquired in 2018. It turns out that there was no drop in Net Property Income (NPI), but instead a surprise increment of 11.0%.

This was how 11% was derived:

FY19/20

NPI for MPB and OPB (annualized) $1.8mil X 12= $21.6 mil

NPI for Japan properties acquired in 2018= $38.137 mil

NPI FY19/20= $59.737 mil.

FY 20/21

NPI = $66.326 mil

Increment= (66.326-59.737)/(59.737) x 100% =11.03% 

For FY20/21 I projected total NPI of $39.937+ $21.362= $61.259 mil.

$66 mil vs $61 mil.

Turns out to be a positive surprise!

The last earnings report showed that the leasing demand in Japan had been stable; unfortunately, Japan was again hit by a resurgence of Covid-19 cases. This led to a quasi state of emergency in parts of Japan such as Chiba, Tokyo and the other small city states.

As the Covid-19 situation in Japan remains very fluid, I prefer to stick on the conservative side. I will assume no growth in NPI from 2021 till 2024, and 2% perpetual growth from 2025 onwards.



Sum of all Present Value= S$1,008,441,000
No. of Units in issue= 3,434,336,938
Per share value (Properties in Japan)= $1,008,441,000/3,434,336,938= $0.2936


2. Properties in China - Sandhill Plaza and Gateway Plaza

Sandhill Plaza

If there’s a second favourite property, this would be my pick.

Like most tech stocks, this property is clearly a beneficiary of Covid-19 with a 5% rental reversion from the prior year and high occupancy of 97.9% during the pandemic. This decentralized business park attracts cost-sensitive tenants, as there has been a shift in demand towards suburban areas due to economic uncertainties.

According to reports, 100% of office staff in Shanghai returned to the office as of April 2020 and the rental market is expected to be resilient. The majority of tenants consists of growing high-tech, IT, and R&D sectors which have been less impacted by Covid-19.

The top tenants seem to be ranked alphabetically, but according to this source, the largest tenant is the entertainment titan, Disney.


Its Compound Annual Growth Rate (CAGR) of NPI stands at 1.24%.

I will assume a 1.24% growth in NPI from 2021 till 2024, and 2% perpetual growth from 2025 onwards.


Sum of all Present Value= S$379,755,000
No. of Units in issue= 3,434,336,938
Per share value (Properties in China- Sandhill Plaza)= $379,755,000/3,434,336,938= $0.1106

Gateway Plaza - Beijing

This commercial hub has sadly been a drag on overall earnings. The only saving grace is that RMB appreciated against SGD and that helped cushion the dip in earnings. The sponsor also deserves much credit by keeping occupancy at 92%, which is substantially above the average Beijing occupancy rate of 82.2% - that’s why I always believe in paying a premium for good management.

According to the latest report, Gateway Plaza’s passing rent is approximately RMB 347.2.

Hence, in my calculation, I will assume occupancy stays at 90% and passing rent dips by 3% for the next 2 years before recovering at 2% from 2025 onwards with the same level of occupancy.



Sum of all Present Value= S$971,259,000
No. of Units in issue= 3,434,336,938
Per share value (Properties in China- Gateway Plaza)= $971,259,000/3,434,336,938= $0.2828

3. Property in Hong Kong - Festival Walk


Festival Walk

I think the worst is behind this heartland mall with support for HK protests dwindling after the National Security law was introduced last year. Moreover, the Covid-19 cases have been well under control with only 1.29 community cases over seven days’ moving average (as of 26th April), to the extent that Hong Kong is willing to establish a travel bubble with Singapore.

As Festival Walk is a suburban mall which serves the community of Kowloon Tong (equivalent to Singapore’s Northpoint City, Waterway Point, Causeway Point), it is less sensitive to tourism and the economy. The recent drop in retail sales leading to negative rental reversion, in my view, was purely caused by social distancing measures, dine-in bans, and the closure of the ice rink during the third wave of Covid-19.

Eventually, when the majority of Hong Kongers gets vaccinated and virus waves recede, the gradual easing of social distancing measures will bring about footfall recovery, which will lead to improvement in NPI.

I foresee a gradual recovery in Festival Walk as Hong Kong increases group size gatherings and eases social distancing rules amid the drop in community cases. So I will assume a 5% growth in NPI till 2025, followed by modest 2% growth.





Sum of all Present Value= S$2,795,428
No. of Units in issue= 3,434,336,938
Per share value (Property in Hong Kong- Festival Walk)= $2,795,428,000/3,434,336,938= $0.8140

3. Property in Seoul - The Pinnacle Gangnam


The Pinnacle Gangnam 


During Sept last year, management announced the acquisition of The Pinnacle Gangnam for $528 million. Under the agreement, MNACT holds 50% interest, and Mapletree Investments own 49.95%. The remaining 0.05% belongs to a third party investor.

When the news broke, I saw analysts commenting that the acquisition was not attractive because of potential downward revision of rents when the lease expires, failing to significantly improve NPI. In my opinion, these analysts are completely missing the point. I believe the acquisition was intended to reduce concentration risks by diversifying the overall NPI. It’s like an investor constructing a diversified dividend portfolio by adding different dividend stocks to reduce unsystematic risk rather than focus on improving overall dividend yields.

Personally, I like this acquisition because of two reasons:

1)      Yield Accretive

2)      Management has a skin in the game.

Yield Accretive

When a REIT like MNACT got beaten down, its dividend yield increased, and it would be harder to acquire yield accretive properties. Yet this acquisition defied all odds and the purchase of Gangnam Property helped to improve overall distribution per unit, though it’s pretty insignificant; after all, it only forms 3% of the total portfolio (refer to calculation below). The higher vacancy may be a worrying sign to many investors, but I think it’s a blessing in disguise as it allows management to renew the lease at higher rental rates.

I wrote to management a few days ago on Gangnam property and here is the management’s reply:

As mentioned in our latest FY20/21 results announcement, for the Seoul office market, demand from the IT, gaming, biotech and pharmaceutical industries is expected to grow moving forward and The Pinnacle Gangnam is expected to provide a growing earnings stream to MNACT.

The important keyword here is ‘growing earnings stream’. Although she didn’t disclose individual lease tenants, I am confident in the sponsor’s ability to renew or lease out tenants at a higher rental rate.

The chart below shows the rental has been steadily increasing and this website shows that Gangnam is up for rent for ₩2810/sqft/month. After some calculation, the rental is about 99,888 as projected.

1 Pyeong :35.5832 Sqft

Asking rent=  2810*35.5832 /Pyeong/month =  99,988.792 Pyeong/month, which is in line with projection shown below.



Management has a skin in the game

Secondly, the sponsor continues to hold almost half of the property in Seoul and that is great. Management can talk whatever they want but I think the best vote of confidence is putting one's own money on the line just like outside investors.

Calculation

Its five months gross revenue is $4.8mil and annualizing would be $11.52mil.

Similarly its five months gross NPI is $3.8mil , and yearly NPI is expected to be $9.12mil.

NPI yield= 79.17%

Contribution to NPI= 9.12/(Total NPI for HK & China & Japan+9.12)*100%

9.12/(6292.040+9.12)*100%= 3.029%

Source: https://links.sgx.com/FileOpen/1_MNACT_ResultsAnnouncement_22Apr2021.ashx?App=Announcement&FileID=662108


As management is optimistic on this one and I share the same sentiments, I would assume a perpetual increment of 1% in rental throughout.


Sum of all Present Value= S$118,399,000
No. of Units in issue= 3,434,336,938
Per share value (Properties in Korea- Gangnam)= $118,399,000/3,434,336,938= $0.03448


Summing Up and Closing Thoughts


Potential upside= ($1.5355-$1.09)/$1.09 x 100%= 29.01% (closing price as of 29th April 2021)

Despite management's attempt to diversify its earnings away from Festival Walk, the HK mall still forms more than 50% of the total intrinsic value of MNACT. Therefore, I believe the price movement will continue strongly correlate with the retail prospects in HK. The past few days have seen very few or zero community cases and a recovery is on the horizon. With that being said, MNACT is set to see brighter days ahead.

Thank you so much for spending time to read my blog and I really appreciate you. If you enjoyed reading my blog, hope you can support me by liking my Facebook page here or share my post. Currently, I do not earn any fees through any affiliate programme or sponsor. If you have any queries, feel free to post them and I am happy to take questions! :)

What are your thoughts on MNACT? Do you think that it is still worth buying at current levels?


My Past Transactions